New Oriental announced results for the third quarter of FY24 (3QFY24, 2023.12-2024.2), with revenue of US$1.27 billion, up 60.1% year over year, and non-GAAP net profit of US$105 million, up 9.8% year over year. Revenue exceeded our expectations, and its high growth continues to be driven by the literacy training business and study abroad business.
There was a strong increase in literacy education enrollment in the fall semester. Strong growth in new businesses, including non-subject literacy training businesses (new businesses such as literacy education and learning machines developed by the company after the “double reduction”), contributed to a high increase in the company's performance. We expect 3QFY24 revenue of $241 million, an increase of 72.7% year over year. Among them, the number of students enrolled in non-subject literacy businesses increased 62.8% year over year to 355,000, continuing to drive high revenue growth. Furthermore, the number of learning machine subscribers reached 188,000, an increase of 74.1% over the previous year. Whether it is the rise in the non-subject literacy business or the continued boom in the number of active users in the learning machine business, it all stems from the reality that supply in the education and training market contracted after the “double reduction”, and demand did not decrease at the same time. We believe that the scale of non-subject literacy training will have a high growth potential, because it will meet the needs of pre-“ double reduction” subject training. We anticipate more than 2 million non-disciplinary competency business trainers in FY24. Meanwhile, New Oriental “double cut” the number of trainees the year before, by about 12 million. If it reaches the same scale, the current literacy business still has room for growth of about 6 times.
Even if the training scale of 12 million people is achieved, its market share is only 6% (we estimate that the literacy business will require about 200 million training sessions per year). We believe that New Oriental's brand, teachers, teaching and research advantages will help the company's literacy business gain a higher market share.
The expansion of teaching sites has been further accelerated, and normalization of policy supervision guarantees the acceleration of expansion. Due to the high number of trainees, the number of 3Q teaching sites increased to 911, an increase of 27.9% year-on-year and 8.1% month-on-month. The company increased the annual growth rate of teaching points to 30%. As a leading indicator of the number of trainees, we believe that the acceleration in the expansion of teaching sites represents a high level of demand, which is beneficial to future enrollment growth. Furthermore, various provinces and cities have successively proposed speeding up the approval of non-subject training outlets, particularly as represented by the Beijing Municipal Education Commission's special action last week. We judge that the demonstration effect of this special activity is extremely strong, and other regions of the country will follow up and rationalize the supervision of academic and non-subject education and training. Especially in the field of non-subject training, given the restart of academic qualification approval, we believe that in the current situation where supply and demand in the industry is tight and demand is strong, we believe that the outlets of non-subject training institutions will accelerate to seize more market share in the blue ocean market. Judging from the pace of approval, applications from institutions with operational qualifications to add teaching outlets will be more likely to be approved, so New Oriental, which already has experience in running schools in more than 70 cities across the country, will have a strong first-mover advantage.
Demand for study abroad businesses quickly recovered. With the elimination of the epidemic, the study abroad market showed signs of rapid recovery. We expect the study abroad training and study abroad consulting business to contribute US$254 million in 3QFY24, an increase of 40.1% over the previous year. In particular, the study abroad examination and training business has recovered rapidly, benefiting from the recovery of the study abroad market on the one hand. On the other hand, the trend of studying abroad in our country at a young age has also led to a growing number of students studying abroad.
We judge that the study abroad market will maintain medium to high growth even after a rapid recovery, mainly because the proportion of people studying abroad in our country is still very low. Compared with Vietnam's 1.3% study abroad penetration rate of 1.9% (annual students studying abroad divided by high school and undergraduate students), China's 0.4% penetration rate leaves a lot of room for improvement.
Maintain a buy rating. Because the company further increased the speed of network expansion, the company's operating profit margin remained flat compared to the same period as the previous year due to costs such as rent and hiring additional teachers. However, we believe that with multiple quarterly reports achieving a high increase in the non-disciplinary literacy training business, the market will focus on the company's growth, so the profit margin pressure brought about by preemptive costs and expenses under capacity expansion will no longer hinder the company's valuation increase.
Due to accelerated capacity expansion, we raised the company's 24/25/26 revenue to $4.21 billion, $5.42 billion, and $7.04 billion (originally projected at $4 billion, $5.22 billion, and $6.72 billion). We maintain our profit forecasts for the 24/25/26 fiscal year of $482 million, $664 million, and $869 million. Maintain the target price of 110.81 US dollars under the SOTP valuation, corresponding to a 43.8% increase in the current price, and maintain the buy rating.
Risk warning: Non-subject training supervision policies have been strengthened; overseas geopolitical factors have blocked overseas study visas, and business recovery has slowed down.